Irish economy is the sickest of them all, IMF study claims

Ireland is suffering the severest recession of any advanced economy, the
International Monetary Fund said in its annual health check.

By Telegraph Staff

8:58AM BST 25 Jun 2009

The country is in “the midst of an unprecedented economic correction” with losses at its banks predicted to swell to €35bn (£30bn) over the next two years.

“The stress exceeds that being faced currently by any other advanced economy and matches episodes of the most severe economic distress in post-World War II history,” the IMF said in its report.

The lender forecast that Ireland's economy would contract by 13.5pc between 2008 and 2010, and start to grow around 1pc in 2011 before it stabilizes around 2.5pc for several years.

Despite the bleak view, the fund said Ireland was taking the right steps to counter the economic and financial “shocks”. Ashoka Mody, head of the IMF mission to Ireland, said there was “absolutely no reason” to think that the country will default on its debt.

The collapse of the Irish property markets has led to mounting bad debts at Irish lenders, led by Bank of Ireland and Allied Irish Banks.

Home loans are expected to soar further over the next few years as the recession deepens and the IMF said the losses faced by the banks are equivalent to about 20pc of GDP.

Brian Lenihan, the Finance Minister, has proposed creating a "bad bank", known as the National Asset Management Agency, to buy up such loans as a step toward restoring lending and reviving the economy.

“We must ensure we have a viable banking system to protect jobs and our economy,” Mr Lenihan said after the publication of the IMF report. “The one way of doing that is to clean up the balance sheets of the banks by removing the impaired assets and returning them to normal functionality.”

The IMF expects Irish GDP to shrink a cumulative 13.5pc in the three years to 2010. It also forecast that Ireland’s budget deficit may widen to 12pc of GDP this year, four times the European Union limit and above the government’s 10.75pc projection. The state will only bring the deficit back to the EU limit in 2014, a year behind target, it said.

Ireland had its credit rating lowered to AA from AA+ this month by S&P, which cited the nation’s rising bill for propping up its banks. Fitch Ratings in April downgraded the country to AA+ from AAA.

Standard & Poor’s expects Irish house prices to fall 13pc in 2009 and a further 10pc in 2010. Prices have already dropped 20pc from their peak in early 2007 after almost quadrupling over the previous decade.